STRATEGY ON SUSTAINABLE DEVELOPMENT OF ENERGY SECTOR AND REGULATORY

FRAMEWORK

Ulaanbaatar, Mongolia May 24-26, 2013

“ENERGY MONGOLIA-2013”INTERNATIONAL CONFERENCE

Chairman Mr. Otgonbayar, Sainbuyan Energy Regulatory Commission /ERC/ of Mongolia

2

CONTENT

INTRODUCTION

I. LICENSING

II. ENERGY GENERATION AND CONSUMPTION, ECONOMIC DEVELOPMENT ZONE

III. ENERGY RESOURCE OF MONGOLIA:

IV. TARIFF AND PRICING

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ENERGY REGULATORY COMMISSION /ERC/

The Energy Law adopted at the Parliament of Mongolia on February 02, 2001 is based on:

the economic principles, market relations, sectorial and customers’ rights and duties, and the law legally set up Energy Regulatory Authority, the body responsible for economic regulations.

The economic regulatory instrument:

has implemented its functions to grant a license, monitor its implementation through fixing relevant term and requirements, revise and approve licensees’ tariffs, to set selling tariffs to consumers, develop consumer’s connection instructions and Business rule and to ensure their observance, within the framework of the legally provided power and rule.

According to the amendment introduced to the Energy Law in December 2011, the Energy Regulatory Authority was reorganized as an Energy Regulatory Commission.

LAWS MAINLY USED IN ENERGY REGULATION

CIVIL LAW

LAW ON LICENSING

LAW ON ENERGY

LAW ON RENEWABLE ENERGY

LAW ON CONSUMER RIGHT PROTECTION

COMPETITION LAW

Эрчим хүчний салбар дахь зохицуулалтын орчин

LEGAL FRAMEWORK OF REGULATION

RULES AND REGULATIONS

GOVERNMENT RESOLUTION OF MONGOLIA

ELECTRICITY CONSUMPTION RULE

HEAT CONSUMPTION RULE

SECTORIAL MINISRTY ORDER

GRID RULE

CENTRALIZED HEAT SUPPLY RULE

COMMISSION /ERC/ DECISION

BUSINESS RULE AMONG THE LICENSEES

BUSINESS RULE AMONG THE ENERGY SUPPLIER AND CONSUMER

ELECTRICITY SPOT MARKER RULE

ELECTRICITY COMPETITIVE MARKET RULE

PROCEDURE ON REVIEW OF TARIFF PROPOSAL

LEGAL FRAMEWORK OF REGULATION

PRINCIPLES FOR ISSUING LICENSE

A DECISION WHETHER TO ISSUE A LICENSE SHALL BE MADE WITHIN 60 DAYS FROM THE DATE OF RECEIPT OF THE APPLICATION FOR A LICENSE;

IN CASE THE APPLICATION AND ENCLOSED DOCUMENTS FAIL TO MEET THE REQUIREMENTS, THEY SHALL BE RETURNED TO THE APPLICANT WITHIN 10 DAYS FROM THE DATE OF RECEIPT;

THE DECISION TO ISSUE A LICENSE OR A JUSTIFICATION FOR REFUSAL SHALL BE PUBLISHED;

A LICENSE SHALL BE GRANTED TO A FINANCIALLY CAPABLE LEGAL ENTITY, WHICH POSSESSES EXPERIENCE OR IS ABLE TO OPERATE IN THE GIVEN FIELD;

IN CASE SEVERAL LEGAL ENTITIES SUBMIT APPLICATIONS FOR THE SAME TYPE OF LICENSE, THE LICENSE SHALL BE GRANTED ON THE BASIS OF COMPETITIVE TENDERING;

LICENSE ISSUING PROCESS SHALL BE OPEN, PRECISE AND NONE DISCRIMINATIVE MANNER.

I. LICENSING:

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BY DECEMBER 2012, THE ENERGY REGULATORY COMMISSION GRANTED MORE THAN 10 TYPE OF 172 LICENSES IN TOTAL TO 87 ENTERPRISES AND ORGANIZATIONS.

Electricity and heat generation

Importation and exportation of electricity

Electricity and heat transmission

Electricity and heat distribution

Regulated supply electricity and heat

Dispatching

Construction of energy facilities

TOTAL

GRANTED LICENSE

23

16

2

56

59

1

15

172

TYPE OF ACTIVITY

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LICENSE ON CONSTRUCTION OF ENERGY FACILITIES

FOLLOWING ARE SOME OF CONSIDERABLY THE BIGGEST THERMAL POWER PLANT PROJECTS ACQUIRED A LICENSE ON CONSTRUCTION OF ENERGY FACILITIES, BEING SUPPORTED BY THE SCIENCE AND TECHNOLOGY COUNCIL UNDER THE SECTORIAL MINISTRY:

600 MW THERMAL POWER PLANT RELIED UPON THE CHANDGANA TAL COAL FIELD IN THE TERRITORY OF MURUN SOUM, KHENTII AIMAG,

OYU TOLGOI 450 MW POWER PLANT IN KHANBOGD SOUM, UNMNUGOBI AIMAG,

600 MW THERMAL POWER PLANT RELIED UPON THE BUURELJUUT COAL FIELD IN THE TERRITORY OF BAYAN SOUM, TUV AIMAG,

600 MW THERMAL POWER PLANT RELIED UPON THE TSAIDAM NUUR COAL FIELD IN THE TERRITORY OF BAYAN SOUM, TUV AIMAG, AND

600 MW THERMAL POWER PLANT RELIED UPON THE ERDENETSOGT COAL FIELD IN THE TERRITORY OF ALTANSHIREE SOUM, DORNOGOBI AIMAG.

IN TOTAL: 2850 MW

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WIND FARMS:

50 MW WIND FARM IN SERGELEN SOUM, TUV AIMAG, 250 MW WIND FARM IN KHANBOGD SOUM, UMNUGOBI AIMAG, 52 MW WIND FARM IN SAINSHAND SOUM, DORNOGOBI AIMAG, 100 MW WIND FARM IN DALANJARGALAN SOUM, DORNOGOBI

AIMAG, AND 50.4 MW WIND FARM IN SUMBER SOUM, GOBISUMBER AIMAG

IN TOTAL: 502.4 MW

LICENSE ON CONSTRUCTION OF ENERGY FACILITIES

LICENSE ON CONSTRUCTION OF ENERGY FACILITIES

ALTHOUGH THE LICENSES ON CONSTRUCTION OF ENERGY FACILITIES WITH 3351.6 MW CAPACITY WERE ALREADY GRANTED TO ENTERPRISES, PRESENTLY, THERE IS NO LICENSEE THAT HAS FINALLY SETTLED AN INVESTMENT ISSUE AND COMMENCED A PROJECT CONSTRUCTION PHASE IF NOT TO MENTION A “CLEAN ENERGY” LLC 50 MW WIND PARK THAT IS BEING ERECTED IN SERGELEN SOUM, TUV AIMAG.

Operating CHP Licensed Wind Farm Licensed Condensation Electric Power Plant

0

500

1000

1500

2000

2500

3000

793.4

501.6

2850

Central energy system installed capacity and licensed new capacity /MW/

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IN GENERAL, THE POLICY AND LINE TO BE PURSUED IN GRANTING A LICENSE ON CONSTRUCTION OF ENERGY FACILITIES ARE FORMULATED AS FOLLOWS:

TO BE BASED ON ENERGY SUPPLY-CONSUMPTION BALANCE,

TO SUPPORT ADVANCED ENVIRONMENTALLY FAVORABLE AND ECONOMICALLY EFFICIENT TECHNOLOGIES,

A NEW ENERGY SOURCE TO BE CONNECTED TO THE CENTRALIZED SYSTEM SHOULD BE DESIGNED TO OPERATE IN THE SYSTEM’S STATIC AND DYNAMIC STABILIZATION REGIMES, GENERATE A MINIMAL VALUE OF GRAPHIC DECLINATION AND REDUCE A CONSUMPTION OF IMPORTED ENERGY,

TO TAKE INTO ACCOUNT A POTENTIAL IMPACT THAT MIGHT BE IMPOSED BY NEWLY COMMISSIONED ENERGY SOURCES ON THE TECHNICAL SPECIFICATIONS OF THE CURRENTLY OPERATING PRODUCERS AS WELL AS ON THE CONSUMER’S TARIFFS,

TO SUPPORT OR APPRECIATE A PRIVATE SECTOR INVESTMENT,

TO BE CAPABLE TO FINANCE AS MINIMUM AS 30 PER CENT OF TOTAL PROJECT INVESTMENT FROM OWN SOURCES, AND

TO IDENTIFY EITHER A PRACTICABLE CURCUMSTANCE FOR ENERGY EXPORT HAS BEEN PROVIDED OR NOT.

II. ENERGY GENERATION AND CONSUMPTION, ECONOMIC DEVELOPMENT ZONE

I II III IV V VI VII VIII IX X XI XII400

450

500

550

600

650

700

750

800

850

900

802 791

721

660

607

559535

582

651

757

824864

Central energy system peak load in 2012 / by months, MW/

Production and Consumption Unit CES EES WES AUESSouthern

regionTOTAL

Production and Import:              

Thermal Power Plant mln.kW.h 4,575.5 137.5     25.0 4,738.0

Hydropower Plant mln.kW.h     23.5 20.4   43.9

Solar and Wind Station mln.kW.h       0.7   0.7

Diesel Power Plant mln.kW.h       10.8   10.8

Electricity import mln.kW.h 307.8 3.3 85.4 2.7   399.2

TOTAL mln.kW.h 4,883.3 140.8 108.9 34.6 25.0 5,192.6

Consumption:              

Electricity distribution mln.kW.h 3,541.8 112.5 80.0 25.4 13.7 3,773.4

Heat distribution thous.Gkal 6,763.1 208.1     15.2 6,986.4

Electricity export mln.kW.h 21.0         21.0

ECONOMIC DEVELOPMENT ZONE OF MONGOLIA

III. ENERGY RESOURCE OF MONGOLIA:

COAL RESOURCE:

OF 150 BILLION TONS OF TOTAL COAL RESOURCE OF MONGOLIA, BY NOW, OVER 20 BILLION TONS HAVE BEEN IDENTIFIED THROUGH RELEVANT PRELIMINARY AND DETAILED EXPLORATIONS AND PROSPECTING.

CURRENTLY, THERE HAVE BEEN DISCOVERED OVER 200 COAL FIELDS, AND OUT OF THESE, NEARLY 40 COAL FIELDS ARE BEING NOW EXTRACTED. SOME OF INTENSIVELY EXTRACTED COAL FIELDS ARE:

IN THE WESTERN REGION: NUURST KHOTGOR, KHAR TARVAGATAI AND KHUSHUUT,

IN THE KHANGAI REGION: BULGAN AIMAG’S SAIKHAN-OVOO, BAYANKHONGOR AIMAG’S JINST AND KHUVSGUL AIMAG’S MOGOIN GOL,

IN THE CENTRAL REGION: TAVAN TOLGOI, BAGANUUR, SHIVEE ОVОО, TEVSHIIN GOBI, ALAGTOLGOI AND KHANGAI, AND

IN THE EASTERN REGION: ADUUNCHULUUN AND TALBULAG.

AS A RESULT OF CONDUCTING A PETROLEUM EXPLORATION WITHIN WHOLE THE TERRITORY OF MONGOLIA, THERE WERE DISCOVERED NOT SO ABUNDANT PETROLEUM RESOURCES IN THE EASTERN AND GOBI REGIONS. HOWEVER, NO FLAMMABLE GAS RESOURCE HAS BEEN CURRENTLY REVEALED.

RENEWABLE ENERGY RESOURCE:

ACCORDING TO THE RELEVANT STUDY, THE HYDROPOWER CAPACITY RESOURCE OF MONGOLIA IS ESTIMATED AS 6417.7 MW, AND THERE IS A POSSIBILITY TO PRODUCE 56.2 kW.h ENERGY PER YEAR.

FOR MOST OF THE COUNTRY’S TERRITORY, 270-300 DAYS ARE SUNNY PER YEAR, WHILE THE AVERAGE DURATION OF SOLAR ILLUMINATION; ANNUAL MEAN SOLAR ENERGY, AND THE DAILY SOLAR INTENSITY ARE IDENTIFIED RESPECTIVELY AS 2250-3300 HOURS; 1400 kW.h/m2, AND 4.3-4.7 kW.h/m2.

THE WIND POWER CAPACITY RESOURCE OF MONGOLIA IS ESTIMATED AS 836.8 BILLION kW.h AND AN ANNUAL DURATION OF ITS POTENTIAL EXPLOITATION IS 3500-4600 HOURS.

IV. TARIFF AND PRICING:

IN CASE OF BEING CONNECTED TO THE TRANSMISSION GRID:

1 kW.h ENERGY PRODUCED AND SUPPLIED BY WIND POWER SOURCE: 0.08-0.095$

1 kW.h ENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT

WITH UP TO 500 kW CAPACITY: 0.045-0.06$

1 kW.h ENERGY PRODUCED AND SUPPLIED BY SOLAR POWER SOURCE: 0.15-0.18$

IN CASE OF INDEPENDENT OR SEPARATE SOURCES:

1 kW.h ENERGY PRODUCED AND SUPPLIED BY WIND POWER SOURCE: 0.10-0.15$

1 kW.h ENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT

WITH UP TO 500 kW CAPACITY: 0.08-0.10$

1 kW.h ENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT

WITH 500-2000 kW CAPACITY: 0.05-0.06$

1 kW.h ENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT

WITH 2001-5000 kW CAPACITY: 0.045-0.05$, AND

1 kW.h ENERGY PRODUCED AND SUPPLIED BY SOLAR POWER SOURCE: 0.2-0.3$.

THE PRICES AND TARIFFS FOR RENEWABLE ENERGY ARE FIXED AS FOLLOWS IN THE “RENEWABLE ENERGY LAW”:

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PRINCIPLES FOR DETERMINING TARIFF IS IDENTIFIED IN LAW ON ENERGY AS FOLLOWS:

TO SET THE TARIFF BASED ON ACTIVITY REAL COSTS AND EXPENSES;

TO ENSURE APPROPRIATE DEGREE OF REVENUE IN WHICH REQUIRED COSTS AND INVESTMENT RETURN OF LICENSED ACTIVITY SHOULD BE CALCULATED;

TO PROVIDE PRICE SUSTAINABILITY;

THE LICENSEES REVENUE THAT COULD ENSURE ITS FINANCIAL STABILITY;

CENTRAL ENERGY SYSTEM ELECTRICITY PRIME COST PER UNIT /Performance by 2012/

Production cost

48.22 MNT/kWh

Transmission cost

5.22 MNT/kWh

Distribution cost

21.34 MNT/kWh

Transmission loss

1.76 MNT/kWh

Distribution loss

8.03 MNT/kWh

1.

3.

1.2.

4.

5.

Cost per unit 84.56 MNT/kWh

Households

Mining consumers

Industry and enterprises

Average selling price

88.21 MNT/kW.h

Central region TPPs' 0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

78,381.5

28,812.0

39,319.4

22,739.4

169,252.3

Thermal Power Plant cost struc-ture

/mln ₮/

Electricity transmission grid0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

9,338.1

7,981.0

3,830.0

21,149.1

Electricity transmission grid /mln ₮/

Central region distribution net...0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

33,228.8

18,215.7

24,103.8

75,548.3

Central region distribution network /mln ₮/

75,220.6

20,658.7

7,059.125,614.9

33,142.3

7,669.1

13,975.1

16,346.0

3,048.4

17,205.1

145,367.6

17,776.6

56,795.1

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Төвийн бүсийн ДЦС-ууд Цахилгаан дамжуулах сүлжээ Төвийн бүсийн ТС-нүүд

Төвийн бүсийн ТЗЭ-дийн зардлын бүтэц (2011 оны тарифт тусгагдсанаар), сая төг

Түлшний зардал Цалингийн зардал Элэгдлийн зардал Бусад зардал

Cost structure of Central Region Licensees’(performance by 2012)

46.3%

17.0%

23.2%

13.4%

44.2%

37.7%

18.1%

44.0%

24.1%

31.9%

Fuel cost Salary Depreciation Others

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

48.22

7.08 5.22 1.76

21.348.03 91.64

Electricity cost per unit (performance by 2012), MNT/kW.h

Central region average selling price 12,295.5 MNT/Gkal

Central Region Licensees' heat cost structure (performance by 2012)

75,220.6

20,658.7

7,059.125,614.9

33,142.3

7,669.1

13,975.1

16,346.0

3,048.4

17,205.1

145,367.6

17,776.6

56,795.1

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Төвийн бүсийн ДЦС-ууд Цахилгаан дамжуулах сүлжээ Төвийн бүсийн ТС-нүүд

Төвийн бүсийн ТЗЭ-дийн зардлын бүтэц (2011 оны тарифт тусгагдсанаар), сая төг

Түлшний зардал Цалингийн зардал Элэгдлийн зардал Бусад зардалFuel cost Salary Depreciation Others

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IN GENERAL, THE ENERGY REGULATORY COMMISSION FORMULATES ITS POLICY AND LINE TO BE PURSUED FURTHER

ON PRICE AND TARIFF AS FOLLOWS:

TO CREATE A PRICE AND TARIFF SYSTEM BASED ON THE FUNDAMENTAL MARKET ECONOMY PRINCIPLES, AT THE PRODUCTION-SUPPLY LEVEL,

TO FIX TARIFFS THAT COULD ENSURE FINANCIAL STABILITY OF LICENSEES, RELYING ON REAL COSTS AND EXPENSES,

TO CONSIDER SOCIAL FACTORS WHILE FIXING PRICE AND TARIFF. If concretely, it involves issues concerned with protection of consumers interests, considering a tariff of low-income social groups and support of efficient energy consumption,

TO INTRODUCE A CAPACITY AND ENERGY TARIFF BY COMPUTING ENERGY COST AND EXPENSE WITH THE CONSIDERATION OF A LOAD IMPOSED BY CONSUMERS ON ENERGY SUPPLY SYSTEM,

TO DEVELOP AND ADHERE A TARIFF METHODOLOGY THAT COULD ENSURE PRICE STABILITY IN ORDER TO AVOID OF FREQUENT CHANGES IN ENERGY CONSUMER’S TARIFF AND PRICE,

TO DEVELOP A METHODOLOGY FOR ALLOTING THE FUEL AND FIXED COSTS OF THERMAL POWER PLANTS AMONG ELECTRICITY AND HEATING IN ORDER TO COMPUTE PRIME COST OBJECTIVELY STARTING FROM THE PRODUCTION PROCESS.

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EVERYONE CLEARLY UNDERSTANDS THAT FOR THE PROMOTION AND DEVELOPMENT OF OTHER NATIONAL ECONOMIC SECTORS, IT IS SPECIFICALLY IMPORTANT TO OPERATE BY FIXING ENERGY PRICE AND TARIFF CORRECTLY, AND ENSURING A PRICE STABILITY.

IN THIS SENSE, THE ENERGY REGULATORY COMMISSION HAS A SPECIFIC FUNCTION TO MAINTAIN FOLLOWING TWO INTERESTS IN A PROPER BALANCED WAY. THESE ARE:

TO SET COST-BASED TARIFF OF ENERGY LICENSEES ON THE ONE HAND, AND TO TAKE IN CONSIDERATION THE IMPACT OF RELEVANT SOCIAL FACTORS WHILE FIXING CONSUMER’S PRICE AND TARIFF ON THE OTHER HAND.

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THANK YOU FOR YOUR ATTENTION

ENERGY REGULATORY COMMISSION OF MONGOLIA

Address: 14201, Ikh surguuliin gudamj 2a, Sukhbaatar district, Ulaanbaatar

Tel: 976-11- 320126Fax: 976-11- 319335E-mail: info@erc.mnWeb: www.erc.mn